The incomplete narrative of falling investment fees

Headlines that talk of price wars in investment products spell good news, but they don’t tell the whole story

The incomplete narrative of falling investment fees

Even casual followers of news in the investment-fund world know the story behind falling investment fees. With the rise of index funds and recognition of how expenses impact retirement savings, fund providers are feeling the pressure to offer exposure to the capital markets at minimal cost. That has most recently culminated in ultra-low fee ETFs, as well as one that even offers to pay investors to hold it.

But even with those wins, investors have to be wary. As some analysts have pointed out, cheaper products might actually come with worse returns and hidden costs. And as others note, those low-performing products could turn out to be the bait firms dangle to generate sales for their other high-priced offerings.

Beyond that, there are other complications. According to Tom Bradley, president of Steadyhand Investment Funds, the story of fees in wealth management can’t be told by a single downward slope. “[T]here are cross currents — some are bringing costs down, while others are pushing them up,” he wrote in a column for the Financial Post.

Wealth-management fees, he explained, can be divided into two parts: products and distribution. He pointed to the emergence of ETFs as a positive influence: while they still account for just a minor part of the Canadian investment landscape in terms of assets, ETFs have changed the game for fixed-income investors by offering cost-effective exposure to bonds.

“[T]heir low fees are setting the tone,” Bradley said of ETFs in general. He noted that mutual-fund fees have decreased over the last decade: “The moves haven’t been substantial and have favoured larger clients (through increased use of premium pricing), but the direction is right.” Fees, he added, have become an bigger market differentiator as lower-priced funds attract most of the new money.

“Slowing the progress, however, is the growth of more exotic products such as liquid alternative funds which charge a base fee plus a performance fee (the manager receives 10 to 20 per cent of the return),” he said. Fees on segregated funds, he added, are still extremely high.

On the distribution side, he said, is another mixed bag of fee trends. There are more low-cost options than before: those include discount brokers, robo-advisors, and direct-to-client mutual fund companies, though Bradley said the latter has been hollowed out by mergers and strategic repositioning that ended with only a few players standing.

“On the higher end of the service spectrum, there’s been a lot of change but little fee relief,” he continued, pointing to brokerage firms that move clients from commission-based accounts to ones that charge an annual asset-based fee. While fee-based accounts have fewer inherent conflicts of interest and open clients up to non-commission products, Bradley argued that many investors caught in this shift are paying more for a comparable service, as the annual fee of 1.25%-1.75% plus tax is considerably higher than what they previously paid in trading commissions and fees.

Aside from those two main cost categories, he pointed to administration and transfer fees, as well as taxes that eat into returns in non-registered accounts. And investors’ habits and behaviour, which he called the biggest loss of return, hasn’t changed.

“Not having a plan or target asset mix can be very expensive, as can delays getting money invested and hyper-active trading,” he said.


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